SIMPLEs allow higher employee deferrals than most retirement accounts. Employees are only able to make salary reduction contributions.

As of 2016, they are able to defer up to $12,500 a year, but if an employee is over 50, they may defer an additional $3,000 as a “catch-up” contribution. However, an employee may choose not to contribute anything to their SIMPLE IRA.

Employers, on the other hand, are required to make either a dollar-for-dollar matching contribution of 3%, or a non-elective contribution of 2% of the employee’s pay. The 3% match can be reduced to 1% in two out of five years if employees are notified before they make contributions.

The match is based on actual compensation instead of a maximum considered compensation limit, such as $265,000, as in some retirement plans. As with other IRAs, equal treatment of employees is essential. The employer may choose the method for contributions, but each employee is entitled to the same conditions.